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Debating the ‘Tax Burden’

By David Leonhardt April 16, 2010 7:45 amApril 16, 2010 7:45 am

Tony Fratto, the former White House spokesman for the Bush administration, offered some polite criticism of my column this week, in a blog post for CNBC. I want to try to respond to one point that he made in a similar way.

Here’s Mr. Fratto:

“Wealthy face a much higher tax burden than they once did”. Leonhardt writes: “Over the last 30 years, rates have fallen more for the wealthy, and especially the very wealthy, than for any other group In fact.” This is undoubtedly true. It’s also misleading and without meaning. President Kennedy lowered the top rate from 90% to 71%.

Did high income earners actually fork over 90% of their income to Uncle Sam? No. In fact, over the decades the income tax rate has come down substantially as the federal government removed significant offsets used to shield certain types of income and expenditures from taxation. The lowered rate was a trade-off for exposing more income to taxation. That’s what the 1986 tax reform effort was all about.

At any rate, Leonhardt also appropriately refers to the tax burden, and in tax policy when we refer to the tax burden, we mean the relative share of taxes paid by certain income groups. By this measure, “the wealthy” clearly pay a substantially larger share of the income tax burden than they have in the past.

According to IRS data, in 1987 the top 5% of earners paid 43.26% of all federal income taxes; today, that group pays more than 60% of the tax burden. By contrast, the share of taxes paid by the bottom 50% of taxpayers has continually fallen to now be well under 3% of all income tax revenue today.

I’d argue that most people do not, in fact, think of the tax burden as “the relative share of taxes paid by certain income groups.” When people think of their tax burden, they think of the amount of their income they pay to the government — that is, their tax rate.

By this standard, it’s indisputable that the tax burden for the wealthy has fallen more than for any group. The total effective federal tax rate for the top 0.01 percent of earners — that is, the top 1/10,000th of earners, a group that began at $8.6 million in annual income — was 31.5 percent in 2005. It was the lowest such tax rate since the mid-1980s. In 1979, the total federal rate for the top 0.01 percent was 42.9 percent. This data, from the Congressional Budget Office, exists only for 1979 to 2005. But other research suggests the rate on the very wealthy was higher before 1979.

It’s important to keep in mind that these statistics are talking about the actual taxes people pay on average, not the marginal rates that apply to only some parts of their income — like those Kennedy-era rates Mr. Fratto mentions.

So from 1979 to 2005 the average federal tax rate for the very highest-earning families fell 11.4 percentage points. For the bottom 80 percent of earners, the rate fell only 4 percentage points, and the drop was fairly equal across different sections of this bottom 80 percent, as you can see from the C.B.O. numbers. The drop was smaller for the top 20 percent of earners as a group (exempting the very richest households): about 2 percentage points. In fact, the very highest-earning families now pay only a slightly higher tax rate than the merely affluent.

What, then, explains Mr. Fratto’s statistics showing that the wealthy are paying a much larger share of taxes than in the past? Simply the fact that they’re earning a much larger share of income. The amount of tax they pay on each dollar of income has dropped — but they’re earning vastly more dollars, so they’re paying more taxes.

Once you think about it in this light, you see the problem with Mr. Fratto’s definition of tax burden. He is arguing that the tax burden on the wealthy has risen, but his argument boils down to the fact that the wealthy are paying more taxes because they have have received a big raise over the past 30 years and no other income group has. If this is what it means to have your tax burden increased, I know a lot of middle-class families who would be happy to accept.

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